Fund Takes Advantage Of Housing Tax Credits

FUND WATCH

The Boston Capital Tax Credit Fund

June 2, 1996|HUMBERTO CRUZ

The Boston Capital Tax Credit Fund IV Series 26 is not really a mutual fund but a limited partnership that invests in low-income rental apartments. But don't let the terminology scare you. The fund's goal is to deliver predictable returns, not from the rent that tenants pay each month, but from annual tax credits granted by the U.S. government.

"This is total tax elimination," said Richard J. DeAgazio, president of Boston Capital Services Inc., the nation's biggest sponsor of federal housing tax credit investments. Unlike a tax deduction, which lowers only your tax-able income, a credit results in a dollar-for-dollar reduction of your tax bill.

The housing tax credits were authorized by Congress in 1986 and extended permanently in 1993. To qualify for the credit, taxpayers must invest in afford-able rental apartments designed exclusively for tenants who meet low-income guidelines, and the apartments must be held for at least 15 years.

"This isn't public housing," DeAgazio said. "This is privately owned, privately operated housing with the same rights and privileges of any landlord. And investors would be contributing to creating affordable housing, which is so badly needed in our country, especially for the elderly."

According to the prospectus, the fund this year is expected to generate tax credits worth 2 percent to 4 percent of the money invested; 7-9 percent in 1997; 12-14 percent from 1998 through 2005; 9-11 percent in 2006 and 4-6 percent in 2007. No more tax credits are expected after that. The credits are lower at first because it takes time to build and rent the apartments, DeAgazio said.

But the credits are just one part of the potential investment return. The fund plans to sell the apartments after 15 years, sharing any profits with investors after returning their original investment.

Although Boston Capital has had no experience "turning over" properties _ the first money in the first of 26 fund series was not raised until 1987 _ the company expects to make most of its prof-its from the eventual sale of the rental apartments, DeAgazio said.

If the worst happens _ the apartments are worth nothing after 15 years and investors can't write off any of the money they put in _ they still would enjoy a 6.4 percent "internal rate of return" based on the tax credits. That would be akin to getting paid 6.4 percent interest tax-free a year on a mortgage that eventually returns the principal. Previous fund series since 1987 have generated double-digit tax credits most years.

Now for the risks. Tax credits are complicated and there is a limit on how much a person can claim. If the investments in the apartment complexes go sour, investors may lose future tax cred-its or a portion of those already taken. There is much less liquidity than with a mutual fund, although it is usually possible to sell out before the partnership is dissolved.

Still, tax-credit investments have been popular with big corporations such as General Electric, Disney and AT&T, which historically have accounted for about 80 percent of the money invested in federal housing tax credits nationwide.

"The reasons corporations do it is the same reason individual investors should look into them," DeAgazio said. "You save income taxes and also encourage the creation of affordable housing."

The law allows individual investors to eliminate taxes on a maximum $25,000 of income. Thus a taxpayer in the 28 percent tax bracket can get a credit no higher than $7,000 a year (28 percent of $25,000). A chart with this article shows the maximum one-time investment expected to generate the maximum tax credit.

Knowing they can expect a tax credit when they file their return, investors can adjust their withholding at work to have less money taken out of each paycheck and then put the money to work when they get it, DeAgazio said. "We encourage people to take those tax savings which they normally wouldn't have and invest them systematically in, say, a mutual fund," he said.

FUND FACTS

-- Objective: To generate federal housing tax credits for 10 to 12 years and to provide appreciation potential from increases in the value of rental properties.

-- Holdings: A portfolio of 36 affordable housing properties in 16 states, including the 17-unit Madison Apartments on Third Street and Washington Avenue in Miami Beach.

-- Minimum investment: $5,000. Minimum subsequent investment: $1,000.

-- Fees: Of each dollar raised by the fund, about 16 percent pays for fees and expenses.